According to Deloitte's latest London Office Crane Survey, the total office space under construction in the capital is 15.1m sq ft, which compares to 15.3, sq ft in the previous survey as projects take longer to complete during the pandemic.
Deloitte's pointed to the decline in new construction, which is broadly in line with the long term average trend. However, 40% of new offices have already pre-let which indicates a fall in speculative construction.
This reluctance to embark on new projects has driven a shift towards major refurbishments with more than two thirds of new construction starts featuring major upgrades to existing office stock.
Mike Cracknell, director at Deloitte Real Estate, said that 85% of developers surveyed had pointed to weak tenant demand as a major obstacle to new developments.
But while speculative projects may have taken a back seat, recent good news about the coronavirus vaccine and its rapid deployment in the UK has already brought about a re-rating of London real estate stocks and could see a return to the office, at least in the short run.
Medium term, Cracknell said, there could also be a strengthening of investor demand in London office space. But he also pointed to the increasing number of refurbishment projects as proof that developers are constantly looking to uprate and future proof their stock by creating high quality and Covid-safe workspaces in a market that is increasingly discerning.
Cost and consolidation
Other factors may also be driving the trend towards refurbishment rather than new development. Richard Hammell, UK head of financial services at Deloitte, says the UK financial sector has long been considering its office portfolio.
As the major player in the City, this has traditionally been a major part of doing business, but the sector is now looking to actively reduce costs and consolidate its presence in London as automation bites and functions are distributed elsewhere in the UK or offshore. It's a drift that has been exacerbated by Covid and the seismic shift away from the office towards working from home.
While the need for client engagement, employees collaboration and to deliver meaningful training will continue to require office space, the nature and operational use of that space will continue to adapt in the coming years.
Across the rest of London office building remains at the same levels with 500,000 sq ft under development in the West End and mid-town showing a small uptick in new activity spread across eight refurbishment schemes.
World leaders in home working
The UK is leading the way when it comes to remote working in Europe and it's a trend that isn't going away. 72% of all UK employees would like the opportunity to work more remotely in the future, 10% higher than their European counterparts. It's a growing trend that investors and developers are acutely aware of and are adopting a 'wait and see' attitude to speculative projects.
Meanwhile refurbishment projects continue to provide high quality office accommodation as occupiers make decisions